Much debate is going on at the moment in terms of effects of the recent Western sanctions on the Russian economy and the political system. The biggest focus is usually on the sanctions imposed after February 24th, 2022, after Putin launched a war against Ukraine – but it is also worth looking at the combined effects of the sanctions imposed since 2014, after the first round of Putin’s aggression against Ukraine, since these sanctions were also very serious, and, together with the sanctions of 2022, they produce a significant synergy effect.

However, this effect is disputed by many. Some argue that either sanctions are not working because they didn’t produce an immediate collapse of the Russian economy, or haven’t immediately changed Putin’s policies. Many refer to the handful of most visible macro indicators (GDP, inflation, ruble exchange rate) to argue that Russia is more or less coping with the consequences of sanctions, and that they have ‘little’ actual effect.

The paper below suggests some steps towards a systemic approach on such a complex and long-term subject as evaluating the effect of the 2022 and previous Russia sanctions. Artificially downplaying the effect of the sanctions is fundamentally wrong for making the correct policy choices on deterring the Russian aggressive policies. It is also important to understand how to best evaluate the effects of sanctions in the environment when the data becomes less transparent and accessible, and many sanctions’ effects are being dispersed across various industries and sectors, not yet resulting in a clear macro picture.

Obscure data: Measuring the effects of sanctions just became harder

In the first place, let’s talk about how to evaluate the sanctions’ effects in rapidly degrading data accessibility conditions. Since the beginning of the war against Ukraine, Russia has greatly reduced the transparency of its economy, stopping to publish some vital statistics and corporate data. Most notably, data on foreign trade (exports and imports), oil & gas production, banking sector, accounting of large corporations. Most recently – data on budget spending. became classified. This made it significantly harder to assess the effects of sanctions – and was done on purpose to prevent correct evaluating their effects, which was even explicitly stated during the decisions to stop publishing the relevant statistics were announced. Concealing vital data is an indirect proof that sanctions have strong negative impact on the Russian economy, something that the Kremlin would rather keep obscured.

But it is not just the new secrecy. We also don’t know the real ruble exchange rate – which is vital for assessing the status of an internationally exposed economy. Since March 2022, after the Russian Central Bank has introduced draconian new currency regulations unknown since 1990s (and some even since the Soviet times) – tight capital controls, mandatory sales of currency revenue for exporters, prohibition of purchasing currency for households, etc. – the real market exchange rate is no longer known. Yes, there exists the official ruble rate, which has shown a record strengthening since the introduction of new regulatory measures. But there are also multiple indications that international actors have limited interest in using this rate in real-world transactions. For an economy heavily dependent on international trade, including mass imports of goods and critical intermediary components for manufacturing, it is very difficult to talk about measuring indicators like GDP without knowing a real exchange rate for the national currency.

Third, Russian statistics was tricky even before recent war-related developments. For instance, take inflation: it was reported to be at 17,1% in May 2022 against May 2021, but multiple reports indicate that the actual growth of consumer prices is substantially higher. The Central Bank of Russia indicates “observed inflation” (as reported by the population through opinion surveys) as over 25% in May; there are even higher estimates. There are many questions regarding the Russian inflation calculation methodology, which are beyond the scope of this report, but all of them suggest that the official inflation figures should be taken with a grain of salt: for instance, Rosstat traditionally counts the share of food in the Russians’ consumer basket for the purposes of calculating the inflation at just 38% (with cosmetics – below 40%), whereas ROMIR public opinion monitoring service reports that the actual share of FMCG (fast moving consumer goods, including mostly food and cosmetics) in total household expenditures stands much closer to 50%. Obviously, food prices growth is higher than the overall consumer inflation, and undercounting its share reduces the overall inflation estimates.

Or take real disposable income: in the past few years, Russian statistics agency Rosstat have changed the methodology of their accounting multiple times, also ceasing monthly publication of data on income and moving only to publishing a quarterly data, which puts in question the overall reliability of these figures. Or labor market: Russian enterprises are accustomed to using various tricky forms of work suspension without laying off workers (reduced working hours, temporary downtime, etc.), which distorts the overall picture of unemployment caused by sanctions. Statistics doesn’t offer good tools to properly account for that.

On the background of all these difficulties with statistics, we suggest to be careful about judging on the status of the Russian economy by a handful of familiar indicators, which may not be relevant at present – but instead to have a deeper look into some of the real underlying trends, which are described below. Some of the data that is still published by the Russian government, plus some international data (on exports to Russia, etc.) allows to judge on the scale of mounting problems, despite the recent surge in secrecy. We have tried to extract the most valuable pieces of the data that is still publicly available to paint a complex picture of the difficulties the Russian economy is currently facing.

What are the key effects of sanctions so far?

When analyzing the consequences of the 2022 Russia sanctions, many analysts tend to repeat one primitive mistake, which should be avoided: focusing on several traditional macro indicators to judge whether sanctions are having any serious effect on the Russian economy or not. GDP, inflation, ruble exchange rate, sovereign debt – a brief look at these indicators doesn’t suggest that anything catastrophic is happening, which leads to popular international headlines like “Russia is weathering sanctions”.

No, it is not, and in the current environment, focus on traditional narrow set of macro indicators is wrong and misleading. First, Russian data is unreliable, and we don’t know the actual market exchange rate, as discussed above – which means that, in the present unprecedented environment, it is probably best to drop the use of widespread macro indicators as we knew them. A more sophisticated toolkit is required to really understand the most important current trends of the Russian economy.

Second, it is no wonder that Russia is capable of maintaining the Potemkin facade of relatively controlled macroeconomic parameters on the background of continuous huge inflow of oil & gas export revenues, availability of significant financial reserves (even on the background of around 300 billion USD of Central Bank’s monetary reserves being frozen by the West), introduction of heavy regulatory measures and loss of data transparency. But what is far more important are the underlying medium- and long-term effects of a major de-globalization of the Russian economy – arguably the largest example of de-globalization of a major economy in history. Russia is being sharply cut off from international markets, financial systems and services, technologies, logistics, supply of intermediary goods for manufacturing, etc. The consequences of all these developments for the Russian economy would be very severe – but they are also much more complex and difficult to measure than a handful of widespread macro parameters, and they couldn’t be felt in just a short period of several months (sanctions have waivers and most of them do not take effect immediately, there are warehouse stocks available, etc.). The consequences will also not occur simultaneously – they will be felt gradually, because consequences for different sectors and industries will be dispersed over time.

However, it is already possible to observe certain severe disruptive effects in data. The first observed effects are output disruptions. Again, these are at the early stages yet, but some of the numbers are striking. According to Russian official statistics agency Rosstat data on industrial output in May 2022, the manufacturing in May 2022 versus May 2021 by 97%, fiber optic cables – by 81%, minibuses – by 77%, locomotives – by 63%, cast sheet glass – by 60%, domestic refrigerators and freezers – by 58%, internal combustion engines – by 57%, freight cars – by 52%, AC motors and TV receivers – by 50%, etc. Some of the vital industries are effectively brought to a halt by sanctions.

This happens on the background of relatively modest decline of industrial output in May: -1,7% overall, -3,2% in manufacturing industries. If one looks at the overall industrial figures, things may not seem so catastrophic, and may create the impression that Russia “weathers through”. But collapse of some of the industries most dependent on critical Western technologies and component parts gives a hint as to what may happen further in other industries as well. Certain major projects may be brought to a halt just due to unavailability of critical technologies – like the mammoth Arctic LNG-2 project by Novatek and Baltic LNG project by Gazprom risk being stopped because of the withdrawal of the German technology company Linde, which supplies critical coil-wound heat exchangers for gas liquefaction.

The industries under threat from sanctions are also some of the most job intensive. Among the industrial sub-sectors, the largest contraction was recorded in the production of motor vehicles (66% decline in output year-on-year in May). This is one of the largest employers throughout the Russian economy – according to the Russian government, just the carmaker industry alone (which nearly collapsed in May) ensures up to 3,5 million permanent jobs, directly and in related industries.

According to the Russian labour Ministry, by end-April 2022, over 40,000 organizations across Russia employing almost 9 million people (that’s over 12% of the total employed workforce in Russia) have reported “change of employment mode”, whatever that means. Here we must stress that the Russian employment statistics is tricky, because employers usually refrain from immediate worker layoffs, but prefer to send employees to “part-time working week” or various forms of “downtime” due to Labor Code constraints and political pressure from authorities which do not like the surges in unemployment statistics (this was a widespread phenomenon during the Covid pandemic in 2020). But, in the present situation, the collapse in manufacturing industries means that both the authorities and employers won’t be able to contain the negative effects of sanctions for the labor market for too long. Even if the employers will nominally keep jobs, the incomes of the Russians will decline because of production disruptions.

The data on disruptions is not limited to the above mentioned Rosstat industrial output datasheet – if one monitors the Russian news, there are plenty of articles describing multiple difficulties across the board, from lack of servers and other hardware for digital infrastructure, to lack of agricultural machinery and seed bank for harvesting, to lack of spare parts for transport vehicles and communications equipment, to disruptions of pharmaceuticals production due to lack of import supplies, etc. The severe disruptive effects are affecting dozens of vital sectors of the economy, and will have macroeconomic consequences in the coming months and years – it will take a lengthy report to simply list them.

Russia is trying to substitute the ongoing de-globalization through different means – once again promoting import substitution, turning to Asian countries for supplies of technologies and component parts for manufacturing. It would take a separate analysis about the effectiveness of those efforts, but at the moment, they are far from yielding practical results, and similar efforts in the past have produced quite limited results. So far, the situation in the output area is not so bright.

Second important effect of sanctions is the collapse of imports. According to some estimates, imports in April may have fallen as much as 70-80% year-on-year  – the official statistics, as mentioned above, is not published since April. Russian Government officials admit decline of imports by 50% in April, and say that import levels have currently at 40% lower mark compared to a year ago.

Decline of imports is happening due to a combination of factors – sanctions, voluntary withdrawal of businesses from working with Russia, declining economic attractiveness of the Russian market. But the consequences are extremely negative on all fronts: declining consumer standards, output disruptions in manufacturing and services, plunging labor productivity. Decline in imports has affected broad range of goods across the board – from consumer to investment goods and components for vital manufacturing. Many of the previously imported goods will be difficult to substitute.

The third important effect of sanctions is the plunge in household living standards as a result of output disruptions, inflation, collapse of imports. As said above, several years ago Rosstat has shifted to publish data on real disposable incomes only on a quarterly basis – but the data for Q1 2022 has already shown contraction of real incomes by 1,2% on a year-on-year basis. But that is expected to accelerate: in the latest end-June publication, Rosstat shows that real wages and real pensions (adjusted to inflation) have contracted by 7-8% in April-May. Incomes are set to decline further as inflation and unemployment take their toll. Interesting phenomenon: the remarkable nominal ‘strengthening’ of the ruble did not translate into notable decline of consumer prices – indicating the artificial nature of the current ruble exchange rate.

It is not only the economic indicators: for instances, surveys note the visible decline of the quality of food in grocery stores. Imports of smartphones were down by 14% in Q1 2022, while the imports of push-button phones by 53% – another indication of deteriorating quality of life for Russians under new sanctions.

The fourth major effect of sanctions is the cutoff of Russia from international capital markets, which deprives Russia from any economic growth prospects. External corporate borrowing was the key factor behind Russian economic recovery from the 2008-2009 financial crisis: the total corporate and banking sector foreign debt had jumped from around $400 billion in mid-2009 to a record $660 billion in July 2014. Most of these loans came from Western financial markets. However, 2014 Western sanctions have effectively blocked the ability to borrow from the West for Russian companies and banks; recent sanctions have eliminated the ability for Russia to continue borrowing at the Western financial markets, and, as the experience of 2014-2022 shows, Chinese financial market can’t substitute that loss, because the Chinese financial system is times smaller and not accustomed to heavily lend money to outsiders.[1]

While Russia still has some cash at hand to manage current problems, it now completely lacks the capital to finance further growth. Current corporate and banking sector foreign debt portfolio stands at below $400 billion – almost $300 billion credit crunch in 8 years.

The fifth effect of sanctions is the contraction of profits from oil & gas exports. Much debate is going on about Russia’s ability to redirect its oil & gas export flows from Europe to Asia – this is a subject of separate analysis, but in short, such shift would be associated with significant additional costs on the background of steep price discounts, e.g. Russia will receive much less profits from the Asian market. For instance, in April-June, the average price of Russian Urals oil blend was about $36 per barrel below Brent average – whereas transporting the oil from Baltic and Black Sea ports is significantly more costly. The infrastructure aimed at exporting natural gas from Western Siberia, the main gas producing region in Russia, to Asia is simply nonexistent, and will take hundreds of billions of dollars (and years) to build.

As an added ‘bonus’ – the Central Bank’s efforts to artificially strengthen the ruble are seriously backfiring now, hurting Russian exporters and forcing the government to the exchange rate policy. It appears that the draconian regulatory measures introduced in March with the purpose to strengthen the ruble were aimed mostly at achieving the psychological effect – calming down the population and markets and promoting the narrative that “Russia is weathering the sanctions”, because “ruble has strengthened”. Russian authorities have a very difficult dilemma here: to either support a strong ruble, seriously hurting the competitiveness of exporters, or to weaken it, prompting inflation and budget spending contraction. Actually, despite much fanfare from the Western financial analysts, the nominal strengthening of the ruble didn’t produce much positive effects on the economy – as said above, it didn’t help to bring down prices – but the negative effects are clear and are currently a subject of heated debate in the government.

Political implications

Because the effects of sanctions are still in their early days and quite dispersed across various sectors, it is probably too early to talk about the political implications just yet. In April 2022, the solid support for Putin’s war had initially plunged, according to Levada Center opinion poll – unconditional support (“firmly support the ‘special operation’ in Ukraine”) shrank from 53% to 45% – but then it had stabilized, with no further effects on public opinion. Beyond doubt, the initial decline in support for the war was strongly associated with negative economic consequences – as well as the relative stabilization, because Russian economy did not immediately descend into chaos, and together with heavy state propaganda the “weathering the sanctions” public narrative has emerged. This is temporary, because the most severe negative effects are yet to come, and there’s hardly any plan to build a successful economy decoupled from the Western world – maximum that the Russian authorities can afford is to mitigate the current negative developments.

Another negative impact on public opinion beyond the economy may be the high death toll from the war in Ukraine – currently, the Russian military is actively recruiting new personnel across the Russian regions for participation in combat. A great majority of this new personnel is poorly trained and will easily become cannon fodder, particularly given the fact that new effective heavy weapons from NATO countries continue to arrive in Ukraine. Death toll from the war against Ukraine in the coming months may reach the levels which will be seen as intolerable across the society.

Political implications of this are to be studied further but given the strong repressive crackdown on the society and the atmosphere of fear sown by Putin’s government, Russia watchers should be cautious against predicting that the negative views of the war and the economic situation would easily transform into mass protests and direct challenges to Putin’s rule. However, further ‘rallying around the flag’ is also unlikely – it has not been happening so far, the declared ‘support’ for Putin’s war is rather passive (there’s no genuine bottom-up movement in support of the war, nearly all pro-war activities are initiated by the administration in a centralized manner, plus extremely little number of volunteer recruits for the war – people are rather being lured for military service with promises of high pay). Further difficulties will most likely continue to put the government’s policies into question, rather than mobilizing people. Opinion polls show that the Russian public doesn’t favor a protracted military conflict.

What seems more likely is that the growth in public discontent and disillusionment, combined with passivity of incapacitated and exhausted bureaucracy and further deterioration of governance, will severely slow down the effectiveness of Putin’s state machine, produce even more visible setbacks, and create an environment when an integrity of Putin’s system and the direction of his policies will be more and more put into question by the Russian society, which will burst out in public, and challenge the narrative of Putin’s supremacy. This may look as something resemblant of the environment which existed in the Soviet Union before 1985 and the arrival of Gorbachev: he started his ‘perestroika’ not out of the blue, but rather as a response to diminished public credibility of the Soviet system and visible bottom-up popular demand for change. The war in Afghanistan of the 1980s played a significant role in public discontent with the Soviet government – even though initially it was also promoted as a ‘limited special operation’ and had little effect on public opinion.[2]

We may soon observe similar trends in the Russian society – but this requires separate detailed analysis.


To sum up: the 2022 Western sanctions are taking a heavy toll on the Russian economy, but the effects are so far dispersed across various sectors and issues, and haven’t yet resulted in strong negative aggregate macro data. But they will – output contraction, collapse of imports, decline in living  standards, cutoff from international capital markets, decline in oil and gas export profits will do their job, being further reinforced by the negative effects of the artificial strengthening of the ruble. Moreover, there are no positive prospects for the situation to improve: as the experience of 2014-2022 proves, instruments like “import substitution” and “pivot to Asia” are only working to a very limited extent and have no capacity to substitute the extent of de-globalization of Russia inflicted by the Western sanctions.

The political developments resulting from these negative developments are yet to be analyzed separately, but the conclusion is clear: sanctions are working, it takes time and patience for them to produce greater effects, the situation is somehow mitigated by the Kremlin given the availability of some hard cash at hand plus the continuous inflow of oil and gas revenues – but that can only help to mitigate the most critical effects of sanctions and maintain the Potemkin macro facade. The underlying negative trends in the Russian economy are quite strong, and would accelerate further in the coming months and years.

Author: Vladimir Milov, Former Deputy Minister of Energy of the Russian Federation, opposition politician, publicist, economist, and energy expert, an economic adviser to the Russian opposition leader Alexey Navalny, and since 2021 a Research Associate at the Wilfried Martens Centre for European Studies in Brussels.

*The views expressed in this piece are of the author alone and do not necessarily represent the official position of GLOBSEC.